Vetting fund managers on DEI: Why it matters

Diversity, equity and inclusion is increasingly important to many advisors and their clients.

The financial services industry has a history of furthering inequality — both within the business and the wider public — and that’s something that consumers want it to address.

That’s according to a report Thursday from Veris Wealth Partners that highlighted ways for advisors to evaluate asset managers on their diversity, equity and inclusion practices.

That, the firm said, may be more important than ever, given the recent Supreme Court ruling against the use of affirmative action at colleges — a development that may already be affecting hiring practices in the private sector.

“Advisors should care because consumers care. Consumers are noticing that the industry is limited in its scope and depth of thought,” said Jane Swan, senior wealth manager and partner at Veris. “I’m hearing from clients that they’re interested in investments that incorporate broader perspectives in how risk is assessed and how opportunity is examined … Having more viewpoints at the table can improve outcomes as we consider a diverse consumer base.”

The firm selects asset managers with teams composed of more than 30% women and people of color, those that have DEI commitments and plans, include DEI factors in their investment processes, invest in diverse portfolio companies and engage with companies on DEI.

Veris reassesses asset managers annually, evaluating the engagement those firms have had on promoting DEI, according to the report.

The company points to case studies on a handful of funds and managers it selects, including Impact America Fund, The 22 Fund and Adasina Social Capital.

“If you look at the more traditional due diligence and risk management frameworks, that has perpetuated a system where almost 99% of assets under management in the industry are owned and led by white males,” said Roraj Pradhananga, managing director of research and partner at Veris. “How do we change the status quo? It is important to look at who the decision makers are at these firms … What are the products and services they are investing in?”

The firm’s report reviews historical policies that have contributed to the racial wealth gap and lists investments designed to promote affordable housing.

Data on diversity have become more widely reported by asset managers in the past few years, and companies have increasingly made commitments to improve their DEI profiles. That trend was accelerated following the 2020 murder of George Floyd, Pradhananga noted.

“There are a lot of commitments being made, and what is important is that it isn’t [just] a surface-level commitment,” he said.

One way that companies have worked to improve DEI is to anonymize names, schools and locations for resumes when reviewing applications for positions. However, the need for improvement in career advancement is obvious, as levels of diversity decline by 75% from entry-level roles to the C-suite, Pradhananga said.

Some companies that have focused on DEI recently have expressed worry following the Supreme Court ruling, Swan said. However, as long as affirmative-action-style hiring practices are focused on expanding the different types of thinking within an organization, the risks associated with continuing to use such practices are low, she said.

But “the recent ruling absolutely accelerates the need for investors to think about how we deploy capital and how we dismantle the barriers to entry that have existed for decades” for women and people of color in the financial services business, she said.

In private markets, only about 1.5% of assets are allocated to managers who are women or people of color, said Natasha Lamb, managing partner and chief investment officer at Arjuna Capital, whose affiliate New Summit Investments focuses on private market investments.

“It’s the result of bias in the system — the networks that people have — and success is being from money [or] from the same colleges,” Lamb said.

“We’re always pressing our portfolio companies to become more diverse,” she said. “There is a business case for it. There is research showing that diverse teams outperform homogeneous ones.”

Some advisors say DEI is critically important on a personal level but also to clients.

“Our clients chose to work with us, in part, based on our commitment to DEI efforts. Our clients are also very savvy about such matters. I have had prospective clients read the firm’s ADV, go to the website of our TAMP and push back on us for this choice due the lack of diversity on the team,” Danika Waddell, founder and president of Xena Financial Planning, said in an email. “Not only is prioritizing DEI the right thing to do, but in order to remain competitive, we need to acknowledge that this is of increasing importance to our clients.”

Laura Lynch, known professionally as The Tiny House Advisor, said she screens fund managers based on team diversity. That is important in part because of the lack of diversity in the business and the growing proportion of wealth that women in the U.S. control, she said.

“Due to the small number of diverse asset managers available, it cannot be the ultimate decision metric,” Lynch said in an email. “However, I do view asset managers who are hiring a diverse team as being more intentional and forward thinking.”